3:AM: It’s been a while since we last spoke. Since then you’ve published several books and before we talk about the new one can you bring us up to date with what’s been happening to your thinking over this past intervening decade?

Diane Coyle: We last talked about The Weightless World which was the first one I wrote about the effects of these new technologies on the way the economy works and the way society works. Looking back on it, that was 1996, I think it was pretty prescient although it got lots of details wrong as well. But I still maintain that the communication revolution of cheap computers and mobile phones and so on have had a radical effect, transforming the structure of the economy. Funnily enough, economics has been really bad at thinking about that in recent decades and if you look back one of the best thinking about these issues about the way technology just completely changes social structures is Karl Marx. And he gets lots of things wrong too. But at least he spotted that technological underpinnings are important. Since then I’ve continued thinking about it.

I did a book in 2001, Paradoxes of Prosperity, that was addressing the kinds of uncertainty people feel when things change so much. The reason they hate what’s happening at a time when the economy looks like it’s doing fantastically well. And we had the productivity figures and a boom in the economy at the time and people were becoming quite emotionally upset because of the changes that were coming about because of this. Globalisation, which was a feature of the fact that you could produce things half way across the world and work out the supply chains and all that communications revolution, so people were upset about that and what that meant and what it was doing for job patterns, how it was deskilling a lot of the labour force in economies.

People were upset about lots of the social effects of the technologies, so we had stories about whether games were destroying our brains and so on, is our concentration going because of the internet, the way that politics is being transformed by social networking and communication etc, etc. All these problems of prosperity upsetting people. Hence the paradoxes. Unfortunately two things happened when that book came out. The dot com bubble was bursting. And the 9/11 attacks happened in the month the book was published. So not a great time to bring it out! But nevertheless I think those issues have stood the test of time and that longer cycle of how the technologies are fundamentally changing society, politics, the way we interact sis right. We’re seeing them coming to a head again now. We’ve had a boom and now we’ve had a bust.

3:AM: So why can’t we just figure this stuff out?

DC: There’s this perception problem where we end up being short-sighted and long-sighted at the same time. So people overestimate the short-term impact of a thing so you get these bubbles like the dot com bubble. People overhype technology but at the same time they greatly underestimate the effect of the technologies on the ordering of society. A good example is the railways. There was a railway mania in the middle of the nineteenth century. Shares did their thing and then collapsed. And people said, ‘Well, that’s railways done with,’ and forgot to take account of the fact that railways made different ways of organisation available. Now there were ways of bringing food in from the countryside into the towns and cities. So now we could support much bigger cities than before. The urban century that we have now, where we have just recently passed the mark where over 50% of the world’s population are living in cities, was made possible by rail. So the effects of that were fifty years and then a hundred years, so we have very long term effects.

3:AM: So the world changed and we suddenly had new policies and a whole new way of looking at the world and what was possible.

DC: Well, I think the book was an over-optimistic book actually because I was focusing on the productivity gains, the variety, the extra options and that was definitely the up-side in the growth of capitalism and at the time. With the end of the Cold War the fiscal benefit of not spending all that money on pointing nuclear weapons at the Soviet Union and the effect that has through the financial markets, all that made it much easier to be optimistic then.

I think events subsequently have made it much harder to be optimistic. If you look around now it’s very hard not to feel very gloomy about the disruptions that are ahead and the likely political reactions to them. I then had what felt like a time where I looked inwards to economics itself. I wanted to write about economics and how various economic problems are thought about by economists and the way they think about problems differently from the way other people think about them.

I did a book called Sex, Drugs and Economics that has done pretty well amongst students and it’s about how would you think about the problem of organised crime or drug trafficking using economic principles. How would you think about the effect of technology on the music industry and the impact of Napster and file sharing. Then I did a book called The Soulful Science that was really a response to criticisms of economics and people saying, ‘This subject makes such artificial assumptions that we don’t like about human behaviour. It’s obviously all rubbish.’

3:AM: So in The Soulful Science you were really standing back and asking yourself just what you were doing as an economist and as a social science. What did you conclude there, because you still hear the criticism – well, you didn’t predict this, and you didn’t predict that, so what’s the point if you keep missing all the important things in economics? So people ask what is the point of economics? It’s a point Ernest Gellner made when he said that the strange thing wasn’t that Aristotle didn’t write about economics, given that he wrote about everything else, but what was strange was that Adam Smith did!

DC: Well I think any honest economist would have to admit that there is an awful lot to criticise in the subject. They might have kept quiet about it in the past but when you look at the failures of forecasting just recently you have to acknowledge that we did a pretty bad job. How much is that to do with the content of the subject and how much is it to do with politics and sociology of the subject and how much is it to do with the way that politicians use economics is pretty complicated. First of all there are two kinds of economics, there’s micro and macro. The micro stuff is looking at individual people, companies and how they make decisions. That too is being challenged by behavioural psychologists.

Daniel Kahneman’s brilliant new book Thinking, Fast and Slow has the thesis that there are lots of contexts where we take decisions that is absolutely clearly not the way economics assumes. So the economist assumes that you look at the information that is available to you, it doesn’t have to be perfect, you can accept information that is not totally accurate, but you can then make a rational decision about it through cognitive processes. And it’s clear that a lot of the time people don’t think like that. Sometimes though, those economic models work really well at predicting. So there are whole branches of economics designing auctions and market design where that model works really well. And there’s lots of data and empirical techniques supporting this where economics is doing a fantastic job.

I think because of the data we have now, there’s a bit of a renaissance in that bit of the subject. But we don’t know where they apply or how to apply the models. It looks like it’s a good approach when you’re making decisions when you’re very uncertain about variables and perhaps you don’t even know what you don’t know. It’s in the world of Donald Rumsfeld‘s ‘unknown unknowns’. That seems the right context for applying the behavioural psychology to economics. There are a whole bunch of economists working on developing models to do with understanding the cognitive science much more carefully. A lot of people who are not economists have used behavioural results to say that economics is completely rubbish and I think that’s a very unfair attack on the subject because economists do use a scientific method and most of them you show them evidence that contradicts the way they think the world works they will change their models. So it’s a really big and important branch of economics as well and also very successful.

Macroeconomics has been pretty flawed. I think you can see this best by not looking at the crisis and its failure to predict but looking at what people say now about what to do. There’s a bunch of economists who say the government needs to tighten its belt, cut deficits, the austerity will signal to financial markets that things are ok and it will be all right. And then there’s another group who say what the government needs to do now is forget the deficit; spend more to get us out of the depression because there’s not enough demand around. When two sets of intelligent people are saying opposite things you’re not in the realm of science. This is politics. And we don’t even know how to assess which of those is right or not because the world is so involved in so many causes of things we can’t determine the relevant factors, you can’t identify the data, identify the relevant causes. And so we need to have a really big rethink about macroeconomics.

People are going back to Keynes because he wrote about radical uncertainty, which is what we have now. His big book was in 1936 so he was responding to the Depression and he changed his mind a lot in the course of his writing, which is one of his strengths actually, and people pick out the bit of Keynes that seems right for their times. So in the 1960s they picked out the bit that said you could fine-tune the economy, which proved wrong. And now people are going back to the bits that say you’ve got to think about uncertainty. And we have to say, there is huge uncertainty. We don’t know, say, about the Euro, we don’t know how the Central Bank will respond, we don’t know what Angela Merkel will decide or the reality of real politik, because this is political as well as economic. We just don’t know what kind of economics we can do when you’ve got all these millions of decisions. So who knows what’s going to happen?

3:AM: So things seem pretty scary. Is it as worrying as it seems at the moment to an expert like yourself?

DC: Yes, it is very, very worrying at the moment.

3:AM: It seems as if the Occupy movements in New York and St Paul’s and elsewhere seem to be a response to a general feeling that there’s something lurking, something horrible and unknown, something we don’t know quite what it is, and we certainly don’t know what to do about it, but it’s a real sense of unease. People keep wanting the protesters to say what it is they want but I think that’s the point: no one knows quite what to do. But the fear is real. People, maybe subliminally, are feeling that this is a critical time.

DC: There’s a story I tell in The Economics of Enough about October 2008 after Lehman Brothers had gone bankrupt when the rate of interest at which banks lent money to each other overnight went through the roof. And I looked at it and thought, ‘They don’t trust each other with their money overnight, so I don’t trust them either.’ I went to the cash machine and got out a lot of cash so I had enough cash to go to the supermarket and buy enough food for the family for the next few weeks if those payment mechanisms between the banks stopped working.

So we are definitely back there. I’m stocking up on the cash again. Because if the European Central Bank doesn’t convince the financial markets that it will do whatever it takes and it can do whatever it takes to guarantee the money that people have in banks then all those markets could dry up. And when the banks start drying up the banks stop having a cash flow problem and it becomes a problem of whether they are solvent or not. And so you could get into a situation where more banks go bankrupt, where people worry that their savings in banks are evaporating, because the basic problem is that all banks lend out more money than they have. One extreme is that we could end up with most of Europe’s banks nationalised because governments have had to step in and say, ‘The banking system has messed up, we’re having to do it instead and run them as if we’re in a planned economy.’ Another extreme is that the fear stalking European politicians at the moment makes them agree that the European Central Bank can do what it needs and it will ebb away again. That’s the radical uncertainty.

3:AM: The theme of your new book is ‘how to run the economy as if the future matters’, and it runs through the whole book this idea that if you’re going to do economics now, certainly at this macro level, you have to discuss a whole bunch of stuff – politics, social policy, education – and that not having an eye to longer term results in the future will be fatal.

DC: The thought linking a whole range of problems, and it’s not just economic but environmental ones, and the social ones of inequality and the civility of life in our cities and so on, is a sense of stewardship. A sense that across the whole range of public policy it’s become extraordinarily short term and there hasn’t been any thought about stewardship for future generations. And at some point what is unsustainable can’t be sustained any longer. And this short termism has been going on for so long that we are getting to that point. So there’s a choice about what kind of breakdown occurs, whether it’s the financial structure, the welfare structure, is it nasty chaotic consequences for people or do you try and make policies that can switch you to a more sustainable frame of mind?

3:AM: One of the things about the future, and something you wrote about in The Weightless World was that technology makes the future very unpredictable. So the problem is how we are to be good stewards, in the way you write about, whilst at the same time staring into an abyss of ignorance?

DC: I’ve been thinking a lot about the Victorian era when there was massive technological change, not just steam but a lot of the secondary technologies around, when there were great social problems and there were the extremes of inequality that we have returned to now, when people had great fears of technology – just think of Frankenstein – so there was that fear as well, so there was Ruskin‘s response to change in his Unto This Last. So there were many, many parallels in a way. And at the same time it was a time of incredible innovation. Not just technological innovation but societal innovation as well. People tried all sorts of things. So people built the museums in South Kensington, they built libraries, they invested in a sewage system, there were campaigns for social reform, schools, you saw Rowntree starting his work. Across the board massive energy went into social experimentation. So that’s the way my thoughts have turned now really. We don’t know, so we need to try lots of things. This will depend on the energies of lots of people trying lots of things.

3:AM: That’s attractive to me. But someone might say that there was a darker side to the Victorian Empire. That in order to sustain the innovation we had to plunder Africa and the colonies and that in order to build the stuff we wanted we were doing pretty nasty stuff elsewhere. Now that’s not an option any more for civilised people, we just don’t think that it’s right to behave like that and have policies like that now. But without the plundered minerals and crushed populations, the wars and so on, the Victorian miracle wouldn’t have been possible. So how can we now innovate in the same way without causing the sorts of inequalities and problems of the Victorian era somewhere else?

DC: You certainly need economic growth and I’m certainly not in the camp that says we can’t have growth anymore for environmental reasons. I think that’s a non-starter. Without growth nothing good is going to happen. And if you don’t want exploitative growth then you’ve got to find ways to have inventive growth instead. All around new technologies there are examples of people inventing things that will make people’s lives better and increase their capacities to do things. Some of them are to do with new energy technologies, some of them are on-line stuff, some of them are about medical treatments and pharmaceuticals. So there’s a whole array of secondary technologies that use the basic ones, or can deliver growth. It’s not easy. None of the developed economies are growing very fast or have been. So if we can get back to the two and a half per cent needed to bring unemployment down that’ll be pretty good going.

3:AM: Now I always read your books with the cyberpunk, steam punk metaphors and stuff, Gibson et al, running through. So I project some of that onto what you’re writing about. I think of you as a kind of Jules Verne economist where you replace the iron and steel of his techno futures with the silicon and graphene of ours. You’re an optimist despite the fear. Is that fair?

DC: Yes, I’m optimistic about human creativity. So I think we should be very cheered by graphene, which is such a light airy material, that if you built an airplane out of it and filled the tank with fuel you’d quadruple the weight with the fuel. It’s an incredible material and there’s going to be massive innovation around that. So in that sense there’s much to be optimistic. But the social and economic stuff is much harder. Getting any kind of change when the proportion of people who trust politicians and the political system is minimal is very hard. And its hard because its really long term stuff. The inequality that we are seeing is partly because the skills that are needed to work with these new technologies are either really quite advanced cognitive skills or cognitive skills that we don’t value in the education system such as creativity – being a good dancer or artist, being a good carer of people, these things we just don’t measure them well, we don’t value them, we tend to chop those people away. So we need to change the education system to get everyone into one of those tracks, give them a good education in it, and if we got that right tomorrow it would take twenty years to get the workforce through, and we’re unlikely to get it right tomorrow because as you know the social fractures that the education system is having to deal with is enormous. We have very damaged children coming into the school system. So it’s probably going to take fifty years.

3:AM: And what about the emergence of China, India and Brazil? So if we take China as an example. There seems to be a democratic deficit there. A pessimist might say, well, they’e just going to take and control the technologies, there’s going to be a small elite who will control everything and they’re going to live forever and the rest of us, we’re going to be the drones, and it’s going to be horrible. It seems that that’s going to need political will rather than anything else. So I guess the question is, how much do you think that technology and innovation will automatically sweep away those problems, or will there be power strictures that will take the innovations and use it for their own evil ends? You think of science fiction scenarios where there are worlds with Darth Vader and his Death Star and so on. China, it seems, could go either way. America might go that way if Leiter and Bloomberg are right about the plutocracy and how power has been bought by a small uber rich minority. The rest of humanity is going to be left in the gutter. That seems to be part of the uneasy fear that people have.

DC: I’ve got a high degree of optimism that the American plutocracy is in its final days. Partly because the national crisis is getting more severe. So, we don’t want the banks to collapse but if they do then this series of successive banking crises is bound to change the political system in the end. I don’t see how politicians could ignore the need for banking reform second time around.

3:AM: Even if the Republicans got in? It seems they can ignore anything!

DC: They could only get in because of populism. There’s definitely populist politics in play in the United States. In a funny way, the Occupy Wall Street and the Tea Party are quite similar.

3:AM: Because they have the same fears?

DC: Yes. The same fears. And the same kind of people. People who feel that they have no control over their destiny. The idea that there are all these rich bastards running things, which is true. So that kind of political reaction is already in play and with freedom of information and so on in the States it’s not likely that they decide to become a police state and monitor everyone. China it would happen differently. But they have their own social tensions. The concern of the Communist Party to maintain stability reflects the fact of their fear that they can’t maintain stability. Their concern reflects their realisation that stability is slipping out of their control. But then again, they are the only people doing advanced nuclear research. We have a fear of nuclear technologies so all the radical innovation around nuclear technologies is going on in China. So they might develop much safer, much cheaper reactors and generate all their power via nuclear, and not let us have the technologies. I think the only way of dealing with that technological race is to carry on doing it here as well. So we may not do nuclear but we might do something else. And that’s a kind of logical response. Or we might decide to go to war with China and have a global war!

3:AM: That’s not a good scenario.

DC: No, but history suggests we shouldn’t just rule it out!

3:AM: So taking your ideas as a whole, what is the best way to proceed? Do we do it all at once or do we try and fix one domain first and then another?

DC: I think you have to take them all together but there is a theme, a common theme, which is about the institutions of society and the way we react to any problem, whether its environmental or financial or whatever. The most alarming of all the problems is that no one trusts the politicians. Wherever you look around the world, the trust people have in politicians and in democratic systems is rock bottom. So I looked at the Mori Poll that they do frequently in the UK and 14% of people said they trust politicians. The bottom of the heap. And I think politicians are generally people who want to help the public and have a sense of public service and are quite passionate about the right way to do it. So there’s some real disjunction between what they are trying to contribute and the way they are being received.

3:AM: So how do you account for that? Are there economic principles behind this trust deficit?

DC: I think it’s a function of institutions, and it applies to big business as well, not having responded quickly enough to these structural changes that we started talking about. So new companies that set up operate in completely new way but long established large slow moving organisations find it hard to change.

3:AM: Like FIFA.

DC: Yes, where you’ve got this radical openness that we have now.

3:AM: When you have David Beckham sounding like the sharpest thing on the planet you know the organisation is in deep trouble.

DC: And Ferdinand tweeting about it, yeah.

3:AM: But I guess this is part of your optimism. The old bloated institutions will have to either adapt or they will die. They can’t survive because the folk are now just too agile and smart to allow these old practices to continue. And it’s what you’re saying about China – for all the bad things they are going to have to be, and are being, innovative and that will corrode the existing institutions.

DC: Yes. I think you have to be strategically optimistic. You have to be optimistic to get people to do things. One thing we know is that things are going to change because everything is very dynamic. The way things change will depend on how people behave and how they behave depends on what they believe so you’ve got to be optimistic and work for the right kind of changes.